(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Case No. D5/13
Profits tax – trading or investment – sections 2(1), 14 and 68(4) of the Inland Revenue
Ordinance.
Panel: Chow Wai Shun (chairman), Chau Cham Kuen and Wong Wang Tai Fergus.
Date of hearing: 12 October 2012.
Date of decision: 7 May 2013.
The Appellant’s appeal concerned the profits tax assessment in respect of its sale of
two shops, Shop D and Shop G. The Appellants contended that both shops were acquired as
capital assets for generating rental income but circumstances turned out to be not favourable
for letting out the two shops as originally intended despite its effort to do so.
Shop D was acquired by the Appellant subject to an existing tenancy of a remaining
term of more than a year. The then existing monthly rental was sufficient, albeit just
marginally during this remaining term, to cover the monthly instalments of mortgage
repayment. The margin was expected to increase at least to the extent possible on an option
to renew by tenant, upon which the monthly rental would increase by 15%. The tenant,
however, did not exercise the option to renew and indeed chose to move to another district
where the rent was at a more affordable level. The Appellant first formalized its effort to
locate a new tenant either shortly before or after the tenant vacated Shop D. The
circumstances transpired that the Appellant simply could not find a tenant who would be
willing to pay the rent that the Appellant had originally expected or even much lower. The
Appellant eventually sold the shop having held it for about 17 months.
As to Shop G, the Appellant held it for just about 8 months, half the holding period
of Shop D and among the shortest of all except two other sales by the Appellant as confirmor
at a loss. Shop G was acquired by the Appellant subject to an existing one-year tenancy of a
remaining term of about 7 months. One peculiar thing was that the vendor agreed to
introduce the existing tenant to the Appellant and undertook to give the existing tenant
sufficient notice to terminate the tenancy. The then existing monthly rental was insufficient
to cover the monthly instalments of mortgage repayment. The Appellant formalized its
effort to locate a new tenant in August 2004 and asked for a new rent at HK$130,000 per
month, which subsequently increased to HK$145,000 but went down again to HK$135,000
in October 2004. The asking rent had been said to have come down to even HK$100,000 in
October 2004. On the other hand, the rent obtained by the new purchaser from the Appellant
of Shop G was HK$120,000 per month from November 2005 and HK$135,000 per month
from November 2006.
198
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Held:
1.
Regarding Shop D, on the objective facts of the circumstances, the Appellant
did intend to acquire Shop D for leasing purposes but the circumstances
turned out not to be so warranting and that the Appellant had to change its
plan and dispose of it when an opportunity arose.
2.
As to Shop G, had the Appellant pursued the reduced asking rent at
HK$100,000 by October 2004 for slightly longer, it should have stood a fair
chance to secure a tenant and picked up the cash flow and hence the
investment yield gradually. It would still have been possible to achieve this if
it had stayed with HK$130,000 as the asking rent at all relevant times and
prepared to wait for slightly longer and accept negotiation slightly
downwards on receipt of a counter-offer. Judging from the overall
circumstances, the Appellant’s decision to sell Shop G was too hasty and
perhaps the intention to sell might even pre-exist at the time of its acquisition.
At the very least, the Appellant’s intention to hold Shop G as a long-term
investment could be said equivocal. As such, the Appellant’s alleged
intention to acquire Shop G for leasing purposes did not stand against the
objective circumstances and facts of the case.
3.
Due to lack of a comparable degree of similarities between the two
transactions as what had happened in Pickford v Quirke (1927) 13 TC 251,
the Board did not find it right to apply Pickford and reverse its findings
regarding the sale of Shop D.
Appeal allowed in part.
Cases referred to:
Lee Yee Shing v Commissioner of Inland Revenue (2008) 3 HKLRD 51
Lionel Simmons Properties Limited (in liquidation) and others v Commissioners of
Inland Revenue (1980) 53 TC 461
All Best Wishes Limited v Commissioner of Inland Revenue (1992) 3 HKTC 750
Marson v Morton [1986] STC 463
Real Estate Investments (NT) Limited v Commissioner of Inland Revenue (2008)
11 HKCFAR 433
Brand Dragon Ltd (in members’ voluntary liquidation) and others v CIR (2001) 5
HKTC 502
Pickford v Quirke (1927) 13 TC 251
Messrs S Y Yang & Co for the Taxpayer.
199
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Leung Kin Wa, Yim Kwok Cheong and Yu Wai Lim for the Commissioner of Inland
Revenue.
Decision:
1.
The Appellant appeals against the Determination of the Deputy Commissioner
of Inland Revenue dated 9 February 2012 in respect of the revised additional profits tax
assessment for 2004/05 and the revised profits tax assessment for 2005/06
(‘the Determination’).
A preliminary issue
2.
By an ‘errata to grounds of appeal’ under the cover of letter dated
24 September 2012, the Appellant’s representative sought to make certain amendments to
the grounds of appeal. However, those suggested amendments, only dealing with
typographical errors, are technical, none of which touches upon any of the stated grounds of
appeal nor adds any new ground. As such, the Respondent raised no objection to any of
those suggested amendments.
Facts
3.
The Appellant raised no dispute to most of the facts upon which the
Determination was arrived at. Regarding those paragraphs that the Appellant did not agree,
we cannot see any cogent contrary evidence raised by the Appellant. Having considered the
evidence given by the witnesses and other documentary evidence submitted, we find the
following facts as the facts relevant to this appeal:
(a)
i.
The Appellant was incorporated as a private company in Hong
Kong in October 1999.
ii.
The issued and paid up share capital of the Appellant was $1,000,
divided into 1,000 ordinary shares of $1 each. At all relevant times,
the shareholders of the Appellant were:
Number of shares held
999
1
Company A
Madam B
iii.
At all relevant times, the directors of the Appellant were:
Director 1
Madam B
Date of appointment
28-10-1999
28-10-1999
200
Date of resignation
4-11-2003
-
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Director 2
Director 3
Date of appointment
28-10-1999
17-10-2005
Date of resignation
-
Director 3 is Madam B’s husband and Director 2 is Madam B’s
brother.
iv.
In its profits tax returns for the years of assessment 2004/05 and
2005/06, the Appellant described its principal business activity as
property investment.
v.
The Appellant closed its accounts on 30 April annually.
(b)
Company A is a company incorporated in Country C. At all relevant
times, the directors of Company A were Madam B, Director 4 and
Director 5. The beneficial owners of Company A were the family
members of Madam B.
(c)
Address D (‘Shop D’)
i.
By a provisional agreement for sale and purchase dated 15 March
2003, the Appellant purchased Shop D at a price of $10,000,000.
ii.
An agreement for sale and purchase was executed on
30 May 2003.
iii.
The purchase was completed on 20 June 2003.
iv.
The purchase consideration of Shop D was financed by:
v.

An interest free and unsecured loan of $6,000,000 from
Company A; and

A mortgage loan of $4,000,000 from Bank E. The loan was
repayable by 72 monthly instalments of $59,884 each
(except the final payment). Fees at 3% on the amount of
prepayment shall be charged if full prepayment was made
within the first year from the date of advance.
Shop D was purchased with a sitting tenant.
agreement included the following terms:
The tenancy

Term: 3 years from 29 June 2001 to 28 June 2004;

Rent: $65,000 per month (exclusive of rates and
201
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
management fee);

Use: medical clinic only;

Tenant’s renewal option: a further term of two years at
$74,750 per month (exclusive of rates and management fee).
vi.
By a provisional agreement for sale and purchase dated
6 October 2004, the Appellant sold Shop D to Company F at a
price of $16,000,000.
vii.
An agreement for sale and purchase was executed on
21 October 2004. The agreement set out that the Appellant was
responsible for the repair work required under a repair order issued
by the Buildings Department.
viii. The sale was completed on 6 December 2004.
(d)
Address G (‘Shop G’)
i.
By a provisional agreement for sale and purchase dated
26 February 2004, the Appellant purchased Shop G at a price of
$23,600,000.
ii.
An agreement for sale and purchase was executed on
16 March 2004, which included the following terms:

The Appellant was aware of an order issued by the Building
Authority on Shop G and agreed to purchase the property
with the order and be responsible for the liabilities under the
order;

The vendor agreed to introduce the existing tenant of Shop G
to the Appellant and undertook, before six months upon
expiration of the tenancy agreement, to require the tenant to
quit and deliver up vacant possession of the property upon
expiration of the tenancy agreement.
iii.
The purchase was completed on 19 August 2004.
iv.
The purchase consideration of Shop G was financed by:

An interest free and unsecured loan of $15,600,000 from
Company A; and
202
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS

v.
A mortgage loan of $8,000,000 from Bank H. The facilities
letter provided that the loan was repayable by 120 monthly
instalments and a prepayment fee of 4 months’ interest shall
be payable if the loan was redeemed within the first
12 months of drawdown. The first 12 instalments ranged
from $77,922 to $80,207.
Shop G was purchased with a sitting tenant.
agreement included the following terms:
The tenancy

Term: 1 year commencing on 1 October 2003;

Rent: $74,000 per month (exclusive of rates and
management fee);

Use: Shop.
vi.
By a provisional agreement for sale and purchase dated
19 October 2004, the Appellant sold Shop G to Company J at a
price of $34,500,000.
vii.
An agreement for sale and purchase was executed on
9 November 2004. The agreement set out that the Appellant
agreed to bear the costs and expenses required under the
abovementioned order issued by the Building Authority.
viii. The sale was completed on 18 January 2005.
(e)
At all relevant times, the Appellant had carried out the following
property transactions:
Property
(i)
(v)
Flat 1 and Car
Parking Space
(Note 1)
Shop K,
Address K
Shops 1, 2, 3 at
Address L
Flat 2 and Car
Parking Space
(Note 2)
Flat 3
(vi)
Flat 4
(ii)
(iii)
(iv)
Purchase
Consideration
$
7-12-1999
20,500,000
Date
Date
-
Sale
Consideration
$
-
15-9-2000
24,800,000
20-8-2004
34,000,000
9-2-2001
25,000,000
29-5-2002
29,800,000
14-12-2001
42,300,000
-
-
29-7-2002
3,000,000
1,500,000
29-7-2002
3,000,000
28-8-2002
(Note 3)
28-8-2002
(Note 3)
203
1,500,000
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Property
(vii)
(viii)
Shop M,
Address M
Shop N,
Address N
Purchase
Consideration
$
16-9-2003
8,500,000
Date
15-9-2004
Date
14,500,000
-
Sale
Consideration
$
-
Notes
i.
The property was provided to a family member of Madam B as
residence.
(f)
ii.
The property was provided to Madam B and her husband as
residence.
iii.
The Appellant sold the property as confirmor.
The Appellant submitted its profits tax returns for the years of
assessment 2004/05 and 2005/06 together with audited financial
statements and tax computations.
i.
The Appellant reported assessable profits of $1,075,654 and
$30,141 in its 2004/05 and 2005/06 profits tax returns
respectively.
ii.
The Appellant’s detailed profit and loss accounts for the years
ended 30 April 2004 and 2005 showed, among other things, the
following:
Rental income
Bank interest received
Gain on disposal of
investment properties
(Note)
Other income
Total income
Less: Operating expenses
Profit for the year
Year ended
Year ended
30 April 2004 30 April 2005
$
$
3,150,900
2,172,860
300
4,422
-
22,950,234
200,000
3,351,200
2,538,680
812,520
47,962
25,175,478
2,862,903
22,312,575
Note:
The gain on disposal of investment properties for the year of
assessment 2005/06 was computed as follows:
204
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Sale proceeds
Less: Agency commission
Legal fee
Redemption penalty
Less: Purchase consideration
Legal fee
Agency commission
Others
Shop D
16,000,000
80,000
17,000
15,903,000
10,000,000
17,645
50,000
5,460,355
Shop G
34,500,000
172,500
12,980
47,189
34,267,331
23,600,000
23,490
118,000
9,640,841
Shop K
34,000,000
170,000
12,140
33,817,860
24,800,000
59,436
148,800
17,160
7,862,464
$5,460,335 + $9,640,841 + $7,862,464 - $13,426 (loss on scrap of
leasehold improvement) = $22,950,234.
iii.
The Appellant’s tax computations for the years of assessment
2004/05 and 2005/06 showed the following:
Profit per accounts
Add: Depreciation charged
Donation charged in accounts
2004/05
$
812,520
1,376,120
2,188,640
2005/06
$
22,312,575
1,496,206
100,500
23,909,281
-
22,950,234
822,820
290,166
1,075,654
1,075,654
872,499
10,047
424,671
(348,170)
378,311
30,141
Less: Profit on disposal of
investment properties
Commercial building
allowance (‘CBA’) (Note 1)
Donation claimed
Others
Add: Balancing charge (Note 2)
Assessable profits
Notes
1.
The CBA claimed was computed as follows:
Shop D
Shop M
Leasehold improvement of
Shop M
205
Deemed
cost
$
5,000,000 *
4,250,000^
16,000
CBA claimed#
2004/05
2005/06
$
200,000
170,000
$
170,000
-
640
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Shop N
Leasehold improvement of
Shop N
Deemed
cost
$
7,250,000†
28,000
Other properties
Total
CBA claimed#
2004/05
2005/06
$
-
$
290,000
370,000
452,820
822,820
1,120
461,760
410,739
872,499
# Calculated at 4% of the deemed cost
* 50% of the purchase price of $10,000,000
^ 50% of the purchase price of $8,500,000
† 50% of the purchase price of $14,500,000
2.
(g)
Included a balancing charge of $200,000 for Shop D.
The Appellant’s balance sheets as at 30 April 2003, 2004 and 2005
showed, among other things, the following:
30-4-2003
$
Non-current assets
Investment properties
Others
Current assets
Deposits and prepayment
Bank balances
Tax assets
Current liabilities
Current portion of bank loans
Others
Non-current liabilities
Loan from Company A
Non-current portion of bank loan
Others
Net assets
Represented by:
Issued capital
Retained profits
Shareholders’ funds
206
As at
30-4-2004
$
30-4-2005
$
90,502,701
3,819,779
109,821,341
4,450,489
91,050,625
1,044,659
23,735
703,500
95,049,715
2,404,106
2,230,995
118,906,931
35,093
2,597,218
54,540
94,782,135
1,800,000
903,431
2,976,228
1,122,827
500,000
456,175
77,888,009
13,800,000
81,418
576,857
95,528,853
17,996,467
35,316
1,247,240
66,027,770
4,208,333
23,589,857
1,000
575,857
576,857
1,000
1,246,240
1,247,240
1,000
23,588,857
23,589,857
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Notes
(1) Notes to the financial statements for the year ended 30 April 2003, 2004 and
2005 showed the date of maturity of the bank loans was as follows:
As at
30-4-2003
30-4-2004
30-4-2005
$
$
$
Repayable within one year
1,800,000
2,976,228
500,000
Repayable within two to five years
7,200,000 12,209,982
2,000,000
Repayable over five years
6,600,000
5,786,485
2,208,333
15,600,000 20,972,695
4,708,333
(2) Notes to the financial statements for the years ended 30 April 2004 and
2005 showed that the Appellant had the following related party
transactions:
Related party
Madam B
Party P
(h)
Position /
connected with
Director
Madam B
Nature
Rental income
Rental income
Year ended
30-4-2004
30-4-2005
$
$
480,000
480,000
480,000
480,000
In accordance with the Appellant’s profits tax return, the Assessor raised
on the Appellant the following profits tax assessment for the year of
assessment 2004/05:
Assessable profits (paragraph (f)i)
Tax payable thereon
$1,075,654
$188,239
(i)
The Appellant did not object to the above assessment which had become
final and conclusive.
(j)
In response to the Assessor’s enquiry, the former representatives of the
Appellant, among other things, provided information and furnished
copies of newspaper advertisements in respect of Shop D. The
Appellant subsequently appointed the current representatives which,
among other things, provided copies of certain other documents.
Company J, the purchaser of Shop G provided certain information. Also
in response to the Assessor’s enquiry, Property Agency Q provided
certain information. The Director of Rating and Valuation provided the
open market rent (exclusive of rates and management charges) of
Shop D and Shop G. All these evidence will be dealt with in
paragraph 15 below.
(k)
Nevertheless, the Assessor was of the view that Shop D and Shop G
were the Appellant’s trading assets and that the profits derived from the
207
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
sale of the properties were chargeable to profits tax and no CBA should
be allowed in respect of Shop D. As such, the Assessor raised on the
Appellant the following additional profits tax assessment for the year of
assessment 2004/05 and profits tax assessment for the year of
assessment 2005/06:
Year of assessment 2004/05 (Additional)
Profit per return
Add: CBA previously allowed in respect of Shop D
(paragraph (f) iii)
Revised assessable profits
Less: Profit already assessed
Additional assessable profits
Additional tax payable thereon
$
1,075,654
200,000
1,275,654
(1,075,654)
200,000
35,000
Year of assessment 2005/06
Profit per return
Add: Gain on disposal of –
Shop D (paragraph (f) ii)
Shop G (paragraph (f) ii)
Difference in depreciation allowance allowed
Donation previously allowed
Less: Balancing charge on Shop D (paragraph (f) iii)
Less: Donation allowable
Assessable profits
Tax payable thereon
(l)
$
30,141
5,460,355
9,640,841
8,477
10,047
15,149,861
200,000
14,949,861
100,500
14,849,361
2,598,638
The current representative of the Appellant, on behalf of the Appellant,
objected to 2004/05 additional profits tax assessment. After further
investigation and consideration, the Assessor considered the 2004/05
additional profits tax assessment and the 2005/06 profits tax assessment
should be revised as follows:
Year of assessment 2004/05 (Additional)
Profit per return
Add: CBA previously allowed for
Shop D (paragraph (f) iii)
Shop M (paragraph (f) iii)
208
$
1,075,654
200,000
170,000
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Year of assessment 2004/05 (Additional)
Less: CBA for Shop M
Revised assessable profits
Less: Profit already assessed
Additional assessable profits
Additional tax payable thereon
$
1,445,654
1,346
1,444,308
(1,075,654)
368,654
64,514
Year of assessment 2005/06
Profit per return
Add: Gain on disposal of –
Shop D (paragraph (f) ii)
Shop G (paragraph (f) ii)
CBA previously allowed for
Shop M (paragraph (f) iii)
Shop N (paragraph (f) iii)
Donation previously allowed
Less: Balancing charge on Shop D (paragraph (f) iii)
CBA for –
Shop M
Shop N
Less: Donation allowable
Assessable profits
Tax payable thereon
$
30,141
5,460,355
9,640,841
170,000
290,000
10,047
15,601,384
200,000
1,346
4,948
15,395,090
100,500
15,294,590
2,676,553
(m) The Determination was so made and handed down. The Appellant
lodged an appeal with this Board.
Grounds of appeal
4.
The Appellant submitted a one-page summary statement of its grounds of
appeal followed by another 8-page document elaborating on those grounds. In essence, the
Appellant argued that Shop D and Shop G were acquired as capital assets for generating
rental income but circumstances turned out to be not favourable for letting out the two shops
as originally intended despite its effort to do so. As such, the subsequent sales were not sales
of trading assets and hence the gains derived by the Appellant from those sales were capital
gains and not chargeable to profits tax. According to the current representatives of the
Appellant, this is particularly so given (a) that the Appellant had a long history of being a
property investor and ample financial resources to hold the two shops as long term
209
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
investments and (b) that the Appellant classified the two shops in its financial statements as
investment properties. The Appellant, on the other hand, contended that the Respondent
had failed to consider all the facts, given undue weight to the length of the Appellant’s
holding period of the two shops, taken into account other factors which should be
considered neutral to this case, relied on speculation rather than evidence and so been
misdirected in reaching the conclusion.
The law
5.
It is common ground that the following provisions of the Inland Revenue
Ordinance apply.
(a)
Section 14 provides:
‘ (1)
Subject to the provisions of this Ordinance, profits tax shall be
charged for each year of assessment at the standard rate on every
person carrying on a trade, profession or business in Hong Kong
in respect of his assessable profits arising in or derived from Hong
Kong for that year from such trade, profession or business
(excluding profits arising from the sale of capital assets) as
ascertained in accordance with this Part.’
(b)
Section 2(1) defines ‘trade’ to include ‘every trade and manufacture, and
every adventure and concern in the nature of trade.’
(c)
Section 68(4) provides:
‘ The onus of proving that the assessment appealed against is excessive or
incorrect shall be on the appellant.’
6.
Mr Leung of the Respondent, in his closing submission, submitted that the
term ‘business’ was also of relevance. ‘Business’ is defined in the Ordinance to include
‘agricultural undertaking, poultry and pig rearing and the letting or sub-letting by any
corporation to any person of any premises or portion thereof, and the sub-letting by any
other person of any premises or portion of any premises held by him under a lease or tenancy
other than from the Government.’ Apart from submitting, in accordance with
Lee Yee Shing v Commissioner of Inland Revenue (2008) 3 HKLRD 51, that business is a
wider concept than trade, the concept had not been referred to again. In fact, we do not see
the concept of ‘business’ important, even if relevant, in the context in front of us.
7.
It is also common ground that the following cases and the legal principles
arisen therefrom apply.
(a)
Lionel Simmons Properties Limited (in liquidation) and others v
Commissioners of Inland Revenue (1980) 53 TC 461;
210
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
(b)
All Best Wishes Limited v Commissioner of Inland Revenue (1992) 3
HKTC 750;
(c)
Marson v Morton [1986] STC 463;
(d)
Lee Yee Shing v Commissioner of Inland Revenue [2008] 3 HKLRD 51;
and
(e)
Real Estate Investments (NT) Limited v Commissioner of Inland
Revenue (2008) 11 HKCFAR 433.
8.
According to Simmons, ‘trading requires an intention to trade: normally the
question to be asked is whether this intention existed at the time of the acquisition of the
asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as
a permanent investment? Often it is necessary to ask further questions: a permanent
investment may be sold in order to acquire another investment thought to be more
satisfactory; that does not involve an operation of trade, whether the first investment is sold
at a profit or at a loss. Intentions may be changed. What was first an investment may be put
into the trading stock – and, I suppose, vice versa.’ (per Lord Wilberforce at page 491).
9.
Mortimer J in All Best Wishes at page 771 stated that ‘the intention of the
taxpayer, at the time of acquisition, and at the time when he is holding the asset is
undoubtedly of very great weight. And if the intention is on the evidence, genuinely held,
realistic and realizable, and if all the circumstances show that at the time of the acquisition
of the asset, the taxpayer was investing in it, then I agree. But as it is a question of fact, no
single test can produce the answer. In particular, the stated intention of the taxpayer cannot
be decisive and the actual intention can only be determined upon the whole of the evidence.
Indeed, decisions upon a person’s intention are commonplace in the law. It is probably the
most litigated issue of all. It is trite to say that intention can only be judged by considering
the whole of the surrounding circumstances, including things said and things done. Things
said at the time, before and after, and things done at the time, before and after. Often it is
rightly said that actions speak louder than words.’
10.
This is echoed by the Court of Final Appeal decision in Lee Yee Shing where
Bokhary and Chan PJJ ruled that the question whether something amounts to the carrying of
a trade (or business) ‘is a question of fact and degree to be determined by the fact-finding
body upon a consideration of all the circumstances.’ In the words of McHugh NPJ, the
intention to trade to which Lord Wilberforce referred in Simmons is not subjective, but
objective and it requires an examination of all the circumstances to see whether the ‘badges
of trade’ are present. Specifically, they are whether the taxpayer:
(a)
has frequently engaged in similar transactions
(b)
has held the asset or commodity for a lengthy period
211
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
(c)
has acquired an asset or commodity that is normally the subject of
trading rather than investment
(d)
has bought large quantities or numbers of the commodity or asset
(e)
has sold the commodity or asset for reasons that would not exist if the
taxpayer had an intention to resell at the time of acquisition
(f)
has sought to add re-sale value to the asset by additions or repair
(g)
has expended time, money or effort in selling the asset or commodity
that goes beyond what might be expected of a non-trader seeking to sell
and asset of that class
(h)
has conceded an actual intention to resell at a profit when the asset or
commodity was acquired
(i)
has purchased the asset or commodity for personal use or pleasure or for
income.
11.
This list coincides much with a similar one in Marson v Morton [1986] STC
463 in which Sir Nicolas Browne-Wilkinson V-C held that ‘a single, one-off transaction
can be an adventure in the nature of trade’ and that ‘the question whether or not there has
been an adventure in the nature of trade depends on all the facts and circumstances of each
particular case and depends on the interaction between the various factors that are present
in any given case.’ Nonetheless, the list of factors was in no sense comprehensive, nor was
any one of those decisive in all cases. They would provide common sense guidance to an
appropriate conclusion. The matters which are apparently treated as a badge of trade
consists of:
(a)
That the transaction was a one-off transaction although a one-off
transaction is in law capable of being an adventure in the nature of trade.
(b)
Is the transaction in some way related to the trade which the taxpayer
otherwise carries on?
(c)
Was the transaction in a commodity of a kind which is normally the
subject matter of trade and which can only be turned to advantage by
realization?
(d)
Was the transaction carried through in a way typical of the trade in a
commodity of that nature?
(e)
What was the source of finance of the transaction?
212
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
(f)
Was the item which was purchased resold as it stood or was work done it
or relating to it for the purposes of resale?
(g)
Was the item purchased resold in one lot as it was bought, or was it
broken down into saleable lots?
(h)
What were the purchasers’ intentions as to resale at the time of
purchase?
(i)
Did the item purchased either provide enjoyment for the purchaser or
pride of possession or produce income pending resale?
In his words, ‘in order to reach a proper factual assessment in each case it is necessary to
stand back, having looked at those matters, and look at the whole picture and ask the
question – and for this purpose it is no bad thing to go back to the words of the statute – was
this an adventure in the nature of trade?’ Alternatively, one may ask, ‘was the taxpayer
investing the money or was he doing a deal?’
12.
In Real Estate Investments (NT) Limited, Bokhary and Chan PJJ opined that
the list offered in Marson v Morton is no less helpful in Hong Kong than it is in the
United Kingdom and held that the question of whether property is trading stock or capital
asset is always to be answered upon a holistic consideration of the circumstances of each
particular case. Regarding the taxpayer’s burden of proof, ‘the taxpayer will have to prove
his contention’ and so ‘his appeal to the Board of Review would fail if the Board positively
determines that, contrary to his contention, the position is X [which is the footing on which
the tax assessment is made]. And it would likewise fail if the Board merely determines that
he has not proved his contention.’ This means that no appeal by the taxpayer could succeed
unless the court is of the view that the true and only reasonable conclusion is that the
position is what the taxpayer contends.
13.
In his submission, Mr Leung referred us to Brand Dragon Ltd (in members’
voluntary liquidation and others v CIR (2001) 5 HKTC 502 which confirmed the principle
that although a limited company is an independent legal person, its intention has to be
ascertained through its controlling mind. We find ourselves bound to follow this.
14.
Mr Leung also referred to a number of Board cases in which the principles set
out above have been consistently applied. We find no basis to disagree.
Other documentary evidence
15.
(a)
In response to the Assessor’s enquiry regarding the objection, the former
representatives of the Appellant furnished copies of newspaper
advertisements in respect of Shop D, which the current representatives
did not dispute and hence we find those as facts of this case:
213
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
Date of advertisement
Name of newspaper
06-07-2004
08-07-2004
12-07-2004
13-07-2004
14-07-2004
15-07-2004
19-07-2004
20-07-2004
21-07-2004
22-07-2004
Newspaper S
Newspaper S
Newspaper S
Newspaper T
Newspaper S
Newspaper T
Newspaper S
Newspaper T
Newspaper S
Newspaper T
Asking rent
$
88,000
88,000
88,000
88,000
83,000
83,000
83,000
83,000
83,000
83,000
(b)
The former representatives did provide other information and put
forward contentions which the current representative sought to dispute.
However, the current representatives did not pinpoint specifically what
they disagreed. In fact, much of these information and contentions were
indeed consistent with what the current representatives and the witnesses
were trying to say to us (see further below). The only exception was
about the gross floor area of Shop D. It remained unclear at all relevant
times if it should be 400 square feet as the former representatives
claimed or 900 as stated in the advertisements that the former
representatives furnished. In any event, we do not find this piece of
information significant, material or even relevant to our decision.
(c)
For the objection, the current representatives provided copies of the
following documents which were not disputed and hence we also find
those particulars shown on and from the documents as facts of this case:
i.
A letter dated 30 September 2008 issued by Property Agency R,
which stated that it was appointed to put up Shop G for lease in
August 2004 and the rent asked by the Appellant was $130,000 per
month.
ii.
A letter dated 3 May 2010 issued by Property Agency R, which
stated that the Appellant orally appointed it to put up Shop G for
lease in March 2004 after the Appellant had signed the provisional
agreement to purchase the property.
iii.
Newspaper advertisements in respect of Shop D, which showed
the following particulars:
214
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
iv.
(d)
Date of advertisement
Name of newspaper
08-09-2004
27-09-2004
Newspaper S
Newspaper S
Asking rent
$
79,000
75,000
Newspaper advertisements in respect of Shop G, which showed
the following particulars:
Date of advertisement
Name of newspaper
08-09-2004
27-09-2004
11-10-2004
Newspaper S
Newspaper S
Newspaper S
Asking rent
$
145,000
145,000
135,000
At that time, the current representatives also provided
i.
A photo of a signboard allegedly bearing the address of Shop G;
and
ii.
a schedule showing the bank balances of Company A,
Madam B and her husband during the period from January 2003 to
December 2004.
Both of these documents were subject to cross-examination, which will
be dealt with below.
(e)
On the other hand, in the Determination, the Deputy Commissioner
referred to information provided by Company J, the purchaser of Shop G,
and Property Agency Q, which the current representatives of the
Appellant sought to dispute but yet, again, failed to give any further
particulars to assist us. Particularly, the trend of the asking rents for the
two properties in question as indicated was consistent with other
evidence accepted. In our view, the only contention is whether the
Appellant had ever put up Shop D for sale on 27 September 2004, asking
for a price at $17,000,000 through Property Agency Q. This will be
addressed in our analysis below.
(f)
The Deputy Commissioner, in his Determination, also referred to the
open market rents (exclusive of rates and management charges) of
Shop D and Shop G respectively per the Director of Rating and
Valuation as follow:
215
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
As at
Shop D
Shop G
30-06-2004
30-09-2004
Open market rent
$ per month
60,000
85,000
Such valuations were contended by the current representatives of the
Appellant. In relation to Shop D, they referred to records in the Land
Registry showing comparable rents for adjacent shops. With regard to
Shop G, they referred to the demand by the Stamp Duty Office for
additional stamp duty at the time of its purchase by the Appellant and
from which worked out the monthly rent on the bases of the market value
as adjudicated and a 6% return. This aspect of evidence will be dealt
with in our analysis.
(g)
The Respondent referred us to the following documents, which the
current representatives of the Appellant did not seek to challenge, and as
such we accept those as facts:
i.
A letter dated 7 March 2012 from the representative of Company F,
the buyer of Shop D, which enclosed the licence agreement and the
first rental agreement entered into after the shop was changed hand.
The rental agreement showed that Shop D was leased for three
years from 16 April 2005 to 15 April 2008 at the monthly rent of
$65,000.
ii.
A letter dated 17 September 2012 from Company J, the buyer of
Shop G, which enclosed the licence agreement and the first rental
agreement entered into after the shop was changed hand. The
rental agreement showed that Shop G was leased for 2 years from
5 November 2005 to 4 November 2007 at the monthly rent of
$120,000 for the first year and $135,000 for the second year.
iii.
An announcement in 2004 by the Transport Department on the
implementation of a pedestrian scheme in part of the street where
Shop G located.
iv.
A report in 2004 in Newspaper S which recorded that the shop rent
along the street where Shop G located had increased as a result of
the implementation of the pedestrian scheme but the magnitude
was not as high as the Appellant had asked for Shop G.
Evidence from witnesses
16.
The Appellant called two witnesses: Mr V and Madam B, and submitted
written statements in advance so that the examination-in-chief could be done swiftly.
216
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
17.
Mr V was the estate property agent responsible to the Appellant for the
purchase and the sale of the two shops. Madam B, as seen above, has been a director of the
Appellant and a director of Company A, the majority shareholder of the Appellant. In our
view, Madam B was indeed the controlling mind of the Appellant at all relevant times.
Their witness statements, not unexpectedly, were consistent and corroborative to one
another. From their statements and oral testimonies, it is also our view that Madam B
valued so highly Mr V’s advice at the relevant times that she almost invariably followed his
suggestion in making a decision of the Appellant.
18.
Regarding Shop D, it was purchased with a sitting tenant, for at least another
13 months, when Hong Kong was still an infected area of SARS. According to the
witnesses, the Appellant started to look for a new tenant after the sitting tenant moved out,
through advertisements on newspapers and assistance of Mr V. It was sold, according to the
witnesses, because of an attractive unsolicited offer. In Madam B’s written statement, she
added ‘repeated persuasion by the property agent.’ From her oral testimony, as well as from
the admission of Mr V, Mr V was the said property agent.
19.
With regard to Shop G, the narrative was less straightforward. According to
the written statements, it was purchased by the Appellant on Mr V’s advice that a shopping
centre was expected to be developed in the vicinity and so it would be good for long term
investment. The transaction took almost half a year to complete because, as Madam B put it,
‘the rental [by] the sitting tenant was below market rent and we expected that we could seek
higher rental upon expiry of the tenancy’. However, the Appellant did not find it worthwhile
to negotiate with the sitting tenant as the difference between the rent at that time and the rent
they intended to ask was huge. The Appellant hence put effort in locating a new tenant
instead. However, according to the witnesses, beyond their expectation, the Appellant was
unable to find a suitable tenant for over 7 months even after reduction of the asking rent,
reasons for which put forward by the witnesses included:
(a)
wasted materials being dumped during loading and unloading of goods
from lorries near the junction of the road just a few shops away from
Shop G, which affected the environment and caused frequent traffic
congestion at the junction;
(b)
planned construction works making the area not attractive to customers;
(c)
uncertainty about the future prospect of the economy.
Mr V took all blame for the failure to identify the severity of such problems when he
suggested the purchase to the Appellant. Shop G, according to the witnesses, was sold due
to an unsolicited offer and, again, on persuasion by Mr V.
20.
Madam B gave further evidence regarding the financial aspect of the two
acquisitions. In her evidence, the funding for the two acquisitions was from Company A
217
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
and bank loans. So far as loans from Company A were concerned, they were unsecured,
interest free and never called for full or partial repayment because Company A was
beneficially owned by Madam B’s family members. In relation to the bank loans, it is
Madam B’s evidence that the Appellant had no difficulty in meeting the schedule of
repayment and indeed the Appellant had never encountered any financial problem since its
incorporation and the financial positions of both the shareholders and the directors of the
Appellant remained healthy during the relevant times.
Cross-examination
21.
With respect, we find the cross-examination not so tactfully and effectively
done and indeed, at times, done rather aimlessly.
22.
Mr Leung first questioned, without either stating his purpose at the beginning
or addressing further at his closing submission, why Mr V was not the signatory as property
agent in all the provisional agreements for purchase and sale. Clearly from the
examination-in-chief, Madam B considered Mr V personally her property agent who,
therefore, had the necessary direct knowledge of the transactions, irrespective of whether he
appeared as the signatory as agent on those agreements.
23.
In his cross-examination of Mr V’s evidence, Mr Leung focused on just
Shop G; whereas in the subsequent cross-examination of Madam B, he attempted to strike a
better balance between the two shops.
24.
In cross-examining Mr V with regard to the photo of a signboard allegedly
bearing the address of Shop G, Mr Leung asked the witness if there was any Chinese
character between ‘代理’ (‘agent’) and ‘出租’ (‘for lease’) on the signboard. We believe
what he was trying to suggest that there might be the character ‘售’ (‘sale’) which would
make the intention of the Appellant equivocal. Mr V’s reply was straightforward and made
sense to us. He said that a normal design usually carried two Chinese characters which were
‘租售’ (‘for lease and for sale’), ‘出售’ (‘for sale’) or ‘出租’ (‘for lease’). Mr Leung also
asked about the existence of the name plates of other agents. Mr V’s reply, again, was
succinct. He said categorically that they were not authorized by Madam B.
25.
In cross-examining Madam B, Mr Leung sought to suggest that the two
acquisitions could not have been for investment when one compared the amounts of rent
payable by the sitting tenants and the instalment repayment of the mortgage loan payable by
the Appellant. However, the case for Shop D was that the former exceeded the later and in
the case of Shop G the witnesses already suggested that the existing rent was far below
market price and they expected and hence called for a higher rent.
26.
Mr Leung also referred Madam B to the clause in the bank facilities letter
which provided that the bank would be entitled at any time in its absolute discretion to
cancel the loan facilities or any part thereof and/or to demand immediate repayment of all
218
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
principal, interest and fee and asked her if it was strange to have such a clause. Madam B
replied that it was just a common provision that all banks would have in place, which is
entirely consistent with what people commonly understand. Madam B further said
confidently that had she been demanded to pay she would have had enough money to do so.
27.
In the course of challenging if Company A and the directors have had
sufficient financial resources so that the Appellant had the ability to hold the two shops as
long term investment, Mr Leung asked Madam B for Company A’s financial statements
including audited accounts. However, it is commonly understood that Country C companies,
as Company A is, are not so required. Then Mr Leung asked for bank statements. When
Madam B replied that she had submitted them all to the Respondent, Mr Leung said that
they only had a summary. Further inquiries transpired that the summary was supplied to the
Respondent in August 2009 in response to a requisition raised by the Respondent and indeed
some sample statements were submitted in April 2010 prompted by a further follow-up
letter of the Respondent. No further requisitions were raised by the Respondent since then
and it was not until prompted by a question of a member of this panel that if Mr Leung found
any discrepancy between the bank statements and the schedule submitted that Mr Leung
said yes after checking through the file in hand. Such sample bank statements were not
adduced as evidence beforehand and Mr Leung did not pinpoint and explain further to us
such discrepancy.
Our analysis
28.
Neither of the sales falls into either of the extremes of cases. The subject
matter of the transactions can be used for trading or investment. The sales were not one by a
property developer or a confirmor. The financial arrangements for the acquisitions were not
unusual in circumstances like these. The terms of the bank loans were not particularly
extraordinary.
29.
The Appellant did engage in buying and selling properties since its
incorporation, it still held 4, out of 10, properties. Among the 6 sold, 2 were the subject
matters of this appeal; the Appellant sold the other two as confirmor at a loss; another one
was sold about 15 months after its acquisition with a gross gain of $4.8 million; another one
was sold, also in the year of assessment 2004/05 but after a longer holding period of about
4 years, with a gross gain of about 10 million. We take Mr Leung’s point that whether the
Appellant traded, or in our view was assessed, in any or any combination of the other four
properties sold is not an issue in this appeal. However, we also find it hard to agree with
Mr Leung that the Appellant had thereby frequently engaged in similar transactions, which
should be in turn considered unfavourable to the Appellant. Having said so, a single
transaction can be an adventure in the nature of trade. We are also mindful of another
English authority: Pickford v Quirke (1927) 13 TC 251. In Pickford, a syndicate was
formed to buy and sell cotton mills. After making a profit in the first transaction, it repeated
the transaction three times. The court indicated that an isolated transaction would have
given rise to a capital gain but drew a completely difference inference from the four
incidents taken together. Accordingly, the court held that each of four transactions
219
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
constituted trading.
30.
We asked Mr Leung if it would be possible for us to hold differently with
regard to the two transactions in dispute. He replied that it would be possible since each
property should be viewed in its own in isolation. We, therefore, hold that we may reach a
different conclusion in respect of each of the two transactions. In light of Pickford, we may
hold both transactions constituted trading if we find a comparable degree of similarities
between the two transactions as what had happened in Pickford.
31.
Before we turn to analyze each of the two transactions, we find it appropriate
to address the following issues common to both transactions at this juncture.
(a)
We are bound to apply the well-established legal principles agreed by the
parties and set out above. Among other things, the lists of factors in
Lee Yee-shing and Marson v Morton are by no means comprehensive
and exhaustive. They must be considered in light of and together with
all circumstances of the case before us.
(b)
We find both witnesses credible. Mr V has been forthcoming and honest,
particularly proud of how he managed to talk the parties into sales and
purchases in these two shops and hence creating a business with valuable
commissions from scratch. However, Mr V’s evidence does not offer
much help in determining the objective intention of the Appellant except
to the extent that his advice had been all along mostly followed by
Madam B, the controlling mind of the Appellant. Such heavy reliance,
in our view, also explains at least to an extent why the Appellant had
only carried out feasibility study informally and casually with no written
record of any such study. We cast no doubt on the creditability of
Madam B either. She is a traditional Chinese woman engaging in typical
family investment of properties. She does have sufficient, if not
abundant financial resources herself and from her other family members
but probably does not have much expertise or professional knowledge,
relying on professional advice from others, typically from an accountant
and a property agent whom she believes reliable. Although she may be
able to stand with a short period of negative cash flow, she would
understandably be under pressure and hence change her mind if the
period may be unnecessarily prolonged.
(c)
Mr Leung submitted that the declared (or subjective) intention of the
Appellant was not properly documented since: no minutes had been
produced for the acquisition of Shop D; the minutes for the acquisition
of Shop G did not record that the company acquired the shop for
investment purpose; the minutes for the sales of the two shops did not
record any detail of the disposal. In our view, Mr Leung would have said
that the minutes were at best self-serving if they had been prepared in the
220
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
way that prevented him from making such comment. This view receives
support from Mr Leung’s another submission that the Appellant’s
classification of the two shops as investment properties in the audited
accounts was irrelevant or had to be considered with other objective
facts.
(d)
With regard to the counting of the holding period, we do not agree with
Mr Leung’s approach which suggests that time should be counted from
the date of the assignment for the acquisition to the date of provisional
agreement for sale and purchase for the disposal. Specifically, we see no
legal basis for this suggested approach. We cannot see any reason or
logic why different dates should be picked. The suggested approach
cannot be applied to confirmor sales. It makes much better sense to us to
count the holding period from the first binding agreement, usually the
provisional agreement for sale and purchase, in relation to the
acquisition to that in respect of the disposal.
(e)
Mr Leung also submitted that the sale proceeds from the disposal of the
two shops were used to repay part of the debt due to Company A rather
than acquiring another investment. Relying on what Lord Wilberforce
said in Simmons that a permanent investment may be sold in order to
acquire another investment thought to be a more satisfactory and that
does not involve an operation of trade, Mr Leung argued that the absence
of replacement property in this appeal showed that the Appellant did not
regard the two shops as permanent investment. We do not find the
statement quoted stretched to that far. The Appellant’s explanation that
it found no suitable property for investment at that time and its conduct
to reduce its liability towards a shareholder are at least plausible and
should not be considered unfavourable to its case.
(f)
Both the two shops were subject to a building order issued by the
Building Authority at the time of the Appellant’s acquisition and on
disposal the agreements for sale and purchase provided that the
Appellant agreed to bear the cost and expenses of such repair work as
required. It is Mr Leung’s submission that the Appellant had sought to
add re-sale value to the two shops by such repair. With respect, we
cannot agree. Our understanding of this badge of trade is that there is an
inference of trading if the taxpayer has to perform some work, typically
extensive renovation, on properties before reselling them, or if the
taxpayer has to set up an organization to sell them, in particular, the use
of selling staff, large-scale advertising and establishing a sales office all
point to more than mere sale. Repair work as prescribed by the Building
Authority is an encumbrance on title to the properties which a prudent
solicitor acting for the purchaser would ask for its removal before
completion or at least an undertaking of the vendor to remain responsible
221
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
for the cost and expenses of such repair work. From time to time, it is
even not unusual to see that some purchasers do prefer to buy the
properties with structures which may not be exempted or have been
properly authorized.
Shop D
32.
The Appellant held Shop D for about 17 months (from 15 May 2003 to
6 October 2004). While there is no such legal principle in taxation law that an asset held for
more than 12 months is a long-term investment, there is no such principle either that
anything held for less than 12 months must be a trading asset. The relevant principle is just
that the longer an asset is held, the more likely it is that it was bought for use or investment
rather than resale. In this regard, we compare the Appellant’s sale of the shops at Address L
(see paragraph 3(e) above). The holding period of Shop D is even a month longer. This is,
nevertheless, neither the sole nor the decisive factor and must be considered against other
objective circumstances.
33.
Shop D was acquired by the Appellant subject to an existing tenancy of a
remaining term of more than a year, which does not resemble at the outset to an intention to
dispose of it quickly afterwards. The then existing monthly rental, HK$65,000, was
sufficient, albeit just marginally during this remaining term, to cover the monthly
instalments of mortgage repayment, which was about HK$60,000. The margin was
expected to increase at least to the extent possible on an option to renew by tenant, upon
which the monthly rental would increase by 15% to HK$74,750. Mr Leung submitted that
hardly any money had been left to finance any repayment to Company A if the latter
demanded interest and regular repayment on the shareholder’s loans. However, this has
never happened in this case. Indeed it is unlikely, if ever possible, to happen in such a way
because of the close connection between Company A and the Appellant.
34.
In cross-examination, Madam B said the tenant did not exercise the option to
renew and indeed chose to move to another district where the rent was at a more affordable
level. Mr Leung challenged this by submitting that the tenant was not called to give
corroborative evidence. As we find Madam B a credible witness, together with what we are
going to explain below, we do not see, at least this part of her testimony is concerned, her
being successfully challenged by the Respondent.
35.
The current representatives of the Appellant contended earlier in their
correspondence with the assessor that the Appellant appointed the agency that Mr V owned
for leasing of Shop D in July 2004. On evidence, we find that the Appellant first formalized
its effort to locate a new tenant either shortly before or after the tenant vacated Shop D and
initially asked for an even higher rent at HK$88,000, reduced it to HK$83,000 in mid-July
and further down to HK$79,000 and HK$75,000 by the end of September 2004. Mr Leung
submitted, on the basis of the initial asking rent only, that the asking rent was excessive. In
our view, however, he chose to ignore entirely the reduction in the Appellant’s asking rent
over the period, which we do not think it right. Indeed, the last asking rent was close to the
222
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
rent on renewal if the tenant exercised the option which appears to be reasonable to us but
the Appellant still could not find a tenant. Despite the absence of any corroborative
evidence called for from that tenant and that 12 advertisements were placed in July and
September 2004 (both as submitted by Mr Leung), this sufficiently indicates to us that the
circumstances transpired that the Appellant simply could not find a tenant who would be
willing to pay the rent that the Appellant had originally expected or even much lower. The
fact that the buyer of Shop D from the Appellant managed to rent it out at a monthly rent of
HK$65,000 only from April 2005, almost another 6 months after the disposal by the
Appellant, supports this. The valuation from the Department of Rating and Valuation
quoted by Mr Leung, which is just HK$60,000, further supports this. Since we are on the
Department of Rating and Valuation, Mr Leung referred us to its ‘Hong Kong Property
Review 2005’ which indicated that the market performance of retail properties in 2004 was
indeed very good but suggested that ‘rents moved up by only 9% leading to lower market
yield’. We find this supportive of the Appellant’s case rather.
36.
Contrary to Mr Leung’s submission that, inter alia, since Shop D was of
substantial value it would be reasonable for the Appellant ‘to allow longer vacant period
between two tenancies in order to get the most satisfactory return from the investment’, all
these seem to us that continue to hold Shop D would not produce the return as expected by
the Appellant. It appears only natural to us that the Appellant considered another option,
that is, to dispose of Shop D, when it was opportune to do so. However, this does not
necessarily mean or lead to the conclusion that the Appellant had a trading intention at any
relevant time.
37.
The Appellant submitted that it did not intend to sell Shop D when the shop
was bought; that the sale was prompted by an unsolicited attractive offer; and that it had
never instructed Property Agency Q as its agent. Mr Leung submitted to the otherwise and
relied on the response from Property Agency Q to the Assessor’s enquiry that Shop D was
offered for sale at HK$17 million, which the Appellant disputed. He also relied on the
response from the purchaser from the Appellant of Shop D, which contended that it took the
initiative in enquiring the offer and the original price it counter-offered (HK$16 million)
was the final price. We did not hear from anyone from Property Agency Q or the said buyer.
The Appellant was not in a position to offer any evidence in rebuttal. Indeed, in her
cross-examination, Madam B said that she could not recall if she had contacted
Property Agency Q regarding the sale of Shop D. Nevertheless, she did explain that she
might have asked Property Agency Q for its market value. The explanation is plausible to us
not just because we have found Madam B a credible witness but also because the said
instruction to sell was put up only when the last asking rent at HK$75,000 was made out.
From both Mr V’s cross-examination and Madam B’s re-examination, it was possible that
Mr V talked to the purchaser about the shop and came to Madam B with a cheque of the
purchaser as an unsolicited offer, in response to which, Madam B asked Property Agency Q
to see if the offered price was about right. From these, we do not find it appropriate to infer
that the Appellant had actively engage agents to solicit offers to purchase from it Shop D.
38.
Mr Leung also submitted that the quick finalization of price is more consistent
223
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
with a trading deal and is at odds with a long-term investment strategy. However, in light of
the circumstances analyzed above, we do not agree with his submission. Instead, we find on
the objective facts of the circumstances that the Appellant did intend to acquire Shop D for
leasing purposes but the circumstances turned out not to be so warranting and that the
Appellant had to change its plan and dispose of it when an opportunity arose.
Shop G
39.
We are less with the Appellant, however, so far as Shop G is concerned.
40.
The Appellant held Shop G for just about 8 months (from 26 February 2004 to
19 October 2004), half the holding period of Shop D and among the shortest of all except the
two sales as confirmor at a loss.
41.
Shop G was acquired by the Appellant subject to an existing one-year tenancy
of a remaining term of about 7 months. The peculiar thing in the acquisition of Shop G is
that the vendor agreed to introduce the existing tenant to the Appellant and undertook to
give the existing tenant sufficient notice to terminate the tenancy. This was allegedly
prompted by the understanding, probably caused by an advice of Mr V, which a much higher
rent could be fetched (see further below).
42.
The then existing monthly rental, HK$74,000, was insufficient to cover the
monthly instalments of mortgage repayment, which ranged from about HK$78,000 to
HK$80,000. Even in light of Madam B’s evidence that generally she did not care too much
about the level of cash flow and specifically she could accept negative cash flow for a month
or so, this is probably not a wise, if not blatantly wrong, decision to make even at the outset
except what was expected by the Appellant could be materialized very soon after the expiry
of the existing tenancy.
43.
The current representatives of the Appellant contended earlier in their
correspondence with the Assessor that the Appellant appointed the agency that Mr V owned
for leasing of Shop G in March 2004. From the evidence, we find that the Appellant
formalized its effort to locate a new tenant in August 2004 and asked for a new rent at
HK$130,000 per month, which subsequently increased to HK$145,000 but went down
again to HK$135,000 in October 2004. According to the current representatives in their
earlier response to the Respondent, the asking rent had been said to have come down to even
HK$100,000 in October 2004. The rent obtained by the new purchaser from the Appellant
of Shop G was HK$120,000 per month from November 2005 and HK$135,000 per month
from November 2006. Had it pursued the reduced asking rent at HK$100,000 by
October 2004 for slightly longer, as contended by the current representatives, it should have
stood a fair chance to secure a tenant and picked up the cash flow and hence the investment
yield gradually. It would still have been possible to achieve this if they had stayed with
HK$130,000 as the asking rent at all relevant times and prepared to wait for slightly longer
and accept negotiation slightly downwards on receipt of a counter-offer.
224
(2013-14) VOLUME 28 INLAND REVENUE BOARD OF REVIEW DECISIONS
44.
The current representatives of the Appellant submitted, with reference to the
demand by the Stamp Duty Office for additional stamp duty at the time of the Appellant’s
disposal of Shop G, that the asking rent of HK$135,000 was less than that on the basis of a
6% return from the market value as adjudicated. In our view, this is retrospective, contingent,
arbitrary and inappropriate. The reality, from the objective circumstances, has been that it is
grossly on the high side.
45.
So, judging from the overall circumstances, the decision to sell Shop G is
considered by us too hasty and perhaps the intention to sell might even pre-exist at the time
of its acquisition. At the very least, the Appellant’s intention to hold Shop G as a long-term
investment could be said equivocal. As such, we find that the Appellant’s alleged intention
to acquire Shop G for leasing purposes does not stand against the objective circumstances
and facts of the case.
46.
Since we hold against the Appellant, we see it unnecessary to dwell on other
submissions made by Mr Leung, including the pedestrian scheme in part of the street where
Shop G located and the surrounding neighbourhood of Shop G.
Other issues
47.
We do not find it right to apply Pickford and reverse our findings regarding the
sale of Shop D. This is due to lack of a comparable degree of similarities between the two
transactions as what had happened in Pickford.
48.
The Appellant had raised no issue regarding the adjustment of CBA for
Shop M and Shop N made in the Determination. As such, we hold that the adjustment be
maintained.
Conclusion
49.
Accordingly, we allow partly the appeal of the Appellant and remit the case to
the Respondent to further revise the assessments in paragraph 3(l) in light of our opinion.
225